Consider Investing in Small Businesses This Year

Gains from selling qualified small business stock (QSBS) issued between now and year-end are eligible for a zero percent federal income tax rate on gains. Shares must be held for over five years (until 2016 at the earliest for shares issued now), but it’s an unprecedented opportunity to avoid federal capital gains tax.The IRS is offering this short-term deal as a way to spur investment in small businesses. There are several rules that define a qualified small business corporation (QSBC), but primarily it applies to domestic C corporations. Any business with a main asset of reputation or skills of employees (service providers) are excluded, so HG&K does not qualify as a QSBC, for example. The QSBC’s gross assets also cannot exceed $50 million: (1) at all times on or after August 10, 1993 and before the stock is issued and (2) immediately after the stock is issued. However, the QSBC is allowed to grow past $50 million after stock is issued and not lose its QSBC status for that reason.Qualified issuing dates for the 100 percent federal income tax gain exclusion are for QSBC shares issued between September 28, 2010 and December 31, 2011. An enhanced 75 percent gain exclusion break is available for QSBS that were issued between February 18, 2009 and September 27, 2010.  For shares issued before February 18, 2009 and after December 31, 2011, the gain exclusion break reverts back to the standard 50 percent unless Congress takes action.In addition, the IRS has added a tax-free gain rollover break that allows shareholders to sell original QSBS without owing any federal income tax and without losing eligibility for a gain exclusion break when they eventually sell the replacement shares.Talk to HG&K about how the QSBC rules can benefit investment portfolios or potentially provide access to capital for your small business.